China's Corruption Goes Mainstream

China's latest and most lurid graft scandal made the cover of the May 14 issue of Time magazine. The story deserved to be there. It's about massive graft, betrayal, and murder. And it raises questions about China's future.

Before Time magazine's cover, our sister publication, the China Compliance Digest (CCD), was on the story. It carried an item headlined: 'Bribery Made Bo Xilai a Billionaire, Authorities Say Ill-gotten gains allegedly hidden by family members, stashed overseas.'

The story said 'disgraced politician Bo Xilai netted a total of several billion yuan in bribes throughout his career. . . Bo may have amassed one billion yuan (US$160 million) in payoffs from promotion-seeking government officials in Chongqing, the megalopolis where Bo was party chief until his removal in March 2012.'

Another CCD story said, 'Gu Kailai, wife of former Chongqing Party secretary Bo Xilai, has been arrested by Chinese authorities in connection with the mysterious 2011 death of Neil Heywood, a British member of the Bo family's inner circle of friends and advisors. . . . Bo and Gu have not been seen in public since Bo was stripped of all official posts last month. Gu is being held by authorities on suspicion of murdering Neil Heywood, a British national who some suspect was involved in the Bo family's overseas money transfers.'

Feds: Widespread Corruption Is No Defense

Paul Cosgrove and David Edmonds are preparing for trial next month in federal court in California. They face counts for conspiracy to violate the FCPA and the Travel Act, and substantive violations of those statutes.

Most of their one-time co-defendants from Control Components Inc. have pleaded guilty, most lately Stuart Carson and his wife, Hong 'Rose' Carson.

Cosgrove was CCI’s director of worldwide sales, and Edmonds was its vice president of worldwide customer service.

Among the pretrial scrambling is an argument about jury instructions. Cosgrove and Edmonds want an instruction about 'industry practices' in some of the countries where CCI did business. And they want to introduce evidence about corruption in those countries, including China.

But the DOJ is arguing that evidence of pervasive corruption isn't relevant to their guilt or innocence.

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Here's part of the government's motion to exclude certain testimony in advance of the trial. The motion is scheduled to be heard on May 21. The trial is set for June 26, 2012.

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. . . Defendants’ jury instructions and their expert witness disclosures suggest that defendants may attempt a defense based upon custom or industry practice. Defendants have proposed a jury instruction that says “[e]ach of CCI’s sales practices, including its cultivation of customers through presentations and customer events; its use of third-party representatives and consultants to secure business; and its payment of commissions to representatives and consultants, were well-established practices in the industry.”

They have also disclosed that they intend to call an expert witness to testify “about Chinese business practices, including the role of third parties and trading companies, in commercial transactions.” Without accepting the merits of any claim about the ubiquity of bribery or corrupt business practices in China or any other country involved in this case, evidence that a practice is widespread or well-established is not sufficient to make an illegal act into a legal one.

Neither custom nor the widespread nature of an illegal act is a defense to a criminal charge. “Custom, involving criminality, cannot justify a criminal act.” Smith v. United States, 188 F.2d 969, 970 (9th Cir. 1951). Similarly, the fact that other companies may have engaged in similar conduct is irrelevant. Industry practice does not excuse criminal behavior;  The Third Circuit has noted, “[e]ven a universal industry practice may still be fraudulent.” Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 274 (3d Cir. 1998).

Courts have long held that evidence that a practice is customary does not excuse criminal conduct. In Burnett v. United States, a United States Army officer was convicted of conversion of services and labor for causing two United States employees to construct furniture for his personal use and benefit. 222 F.2d 426, 427 (6th Cir. 1955). The defendant argued that it was an Army custom for United States employees to make furniture for Army officers. Id. The Sixth Circuit rejected this argument, stating that “[n]o custom is a justifiable defense for violation of the criminal code of the United States.” Id.

Likewise, in United States v. Brookshire, the defendant, without authorization, transferred $30,000 of funds from the bank where he was employed to another bank which was not an authorized depository for the other bank. 514 F.2d 786, 787-88 (10th Cir. 1975). The defendant transferred the funds in order to secure his personal loan. Id. The defendant was convicted of misapplication of bank funds. Id. at 788. The defendant argued such transactions were common by bankers, because interbank loans typically received lower rates. Id. A defense witness testified that such transactions were “normal and customary” in the banking industry. Id. The Tenth Circuit however, was not convinced and stated that “custom and usage involving criminality do not defeat a prosecution for violation of a federal criminal statute.” Id. at 789 (citing Burnett, 222 F.2d at 427; Smith, 188 F.2d at 970).

In the FCPA context, the Fifth Circuit has rejected a claim that the widespread nature of a practice can create a defense. In United States v. Kay, the defendants, executives at American Rice, paid Haitian officials to reduce duties and taxes on the company’s rice, and were convicted of violating the FCPA. 513 F.3d 432, 439 (5th Cir. 2007). The defendants claimed they did not receive fair notice that such conduct was illegal under the FCPA. Id. at 440. The Fifth Circuit acknowledged that such payments to Haitian officials were widespread among importers conducting business in Haiti, but concluded “[t]he fact that other companies were guilty of similar bribery during the 1990's does not excuse [the company’s] actions; multiple violations of a law do not make those violations legal or create vagueness in the law.” Id. at 442.

Here, as in Kay, defendants’ proposed jury instructions and their expert disclosures suggest the possibility that they will argue that bribery is so widespread in one or more of the countries involved in the indictment that one does not expect to receive criminal sanctions for such actions. The pervasiveness of corrupt conduct is not a defense; accordingly, efforts by defendants to introduce such a defense through expert testimony
or otherwise should be precluded.

Even if a claimed industry custom or practice had some minimal relevance, any probative value would be substantially outweighed by the risk that such evidence would mislead the jury and result in undue delay and waste of time. It should therefore be excluded under Fed. R. Evid. 403 . . . .

Hey, Size Matters

Focus on Latin America: Brazil at a Crossroads (Part Two)

By Andy Spalding

Two separate piles of BRICs? Is that where we’re headed?

Recent events should make us wonder. One the one hand lie China and Russia. Both countries in the last year have enacted statutes prohibiting the bribing of overseas officials. Skeptics will argue that these are but paper laws, unlikely to be enforced any time soon. But let’s remember that the U.S. took no less than 25 years to really begin enforcing the FCPA. China and Russia have set themselves on a similar course; we’ll likely see enforcement progress in the coming years.

India, at the moment, finds itself in the “other” pile. Despite broad-based support for corruption reforms and a much-publicized Gandhian hunger strike, its once-promising corruption bill now languishes in parliament. Bogged down in politics and procedure, onlookers wonder whether the Indian government can ever get its act together and improve the country’s business environment. India’s status as a prospective global leader suffers badly in the process.

Whither Brazil? Will it follow China and Russia, or flounder with India? As I explained in the last post, a critical vote on its anti-corruption bill -- the Clean Company Act -- is scheduled for May 23. An affirmative vote will signal to the world that Brazil aspires to exert real leadership in Latin America and beyond; that it wishes to build a legal system as promising as its economy; that it can be trusted by foreign investors and foreign governments alike; that it will join China and Russia as developing countries whose governments possess both the vision and the capacity to get these laws passed.

But failure to advance the bill will send a very different signal: that its business environment remains high-risk; that its elites tolerate and probably sanction bribery; that its government would rather exploit an unlevel playing field than help make it level; that its legal system may be more prone to entropy than to progress.

Whatever Brazil decides, upcoming events will broadcast its decision to the world. We’ll all know, without a doubt, which course Brazil took. How? We’ll discuss next post.

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Andy Spalding is a contributing editor of the FCPA Blog. He teaches international business law at the Chicago-Kent College of Law. Effective June 1, he’ll be an Assistant Professor at the University of Richmond School of Law.

Extra Credit: China School Sells Brain-Boosting IV Drips to Students

From the China Compliance Digest (Issue No. 15: May 14, 2012):

Officials at Xiaogan No. 1 High School in Hubei Province are under investigation after a student tweeted photos of her classmates hooked up to IV drips dangling from the classroom ceiling.

The drips, which were said to contain concentrated amino acids, were offered as an optional study aid for students preparing to take China's highly competitive college entrance exam next month.

Students were charged 10 yuan (US$1.50) for each IV dose. According to media reports, drips were sold to most Xiaogan students planning to take the exam.

A school official said the drips were largely paid for with an "amino acid subsidy" the government provides for each student taking the exam. The Hubei Province Education Office said there was no such subsidy.
 
Sources: Jinghua Times (京华时报), Global Times

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